The July Chop
What is happening to the forex market technically?
The new half year opened with a week of two halves, the Presidential trade truce from the G20 talks, and a weak ADP report lifted markets to new all-time highs. After the day and half holiday, a strong NFP beat dampened rate cut hopes, which reversed equities and bonds into an inverted-V flat week. USD of course benefited from both moves, posting its best week in over a year.
The thin holiday trading saw markets (notably Gold and SPX) moving to extremes, and the unexpectedly strong NFP print is likely to continue the two way volatility. Why? Because the market remains uncertain about both the vacillating fundamental outlook and consequent central bank policy. Friday’s result will make it harder for Fed Chair Powell to lower rates despite continued pressure from President Trump and our continued projection for a double spike of 2.00% 10-year US yields.
It is not Jay Powell, however, who is most vulnerable to the chop. To some extent index traders but more particularly forex traders will be subjected to the choppy trading. Many are calling an extreme bull market in stocks predicated on both a strong price and, ironically, lower interest rates. Many are calling a collapse based on generally deteriorating fundamentals reflected by those falling yields but yes—also a high price. Yet the reality for now is somewhere in between, before a hesitant typical low VIX move into a 1929/1987 style more aggressive blowout and crash.
DAX’s historic 2010 template published on our analysis page this week shows this perfectly as does our continued reliance on a similar Russell 2000 fractal from 2014. Also a repeating corrective in several indices will help us time these moves as evidenced by our ability to stay short through Independence Day and cover and buy on NFP weakness. Next week we will be publishing templates for subscribers for the blowout, as well as our half-year review. But the historic ATR (average true range, ie volatility) for SPX in July shows why having a such maps will be very instructive.
Similarly some are seeking trend in forex driven, on the one hand, by falling yields and consequently downtrending USDJPY and USDCAD. Others are dismissive due to the failure of USD pairs to sustain moves. EURUSD and AUDUSD whipsaw sell offs caught many euphoric traders off guard in the last week providing a projected sell off that will allow us to buy as the market again gets bearish. Indeed again the reality between trend and consolidation lies somewhere in between. The slow USD turn is trend but won’t seem like it in July, before August and September surprise. Our EURUSD Mirror Reversal shows how difficult the slow USD turn will be. Why? A number of reasons:
This week’s newsletter focuses on the technical analysis answer to What is Happening to Forex. Appropriately this concludes this series at the start of a choppy technical July, a month that should typify what has been happening generally to forex markets in 2019. A technical low volume whippy but nevertheless trending market.
Just as analysis of markets can be broken down into the four FITS pillars: fundamental, intermarket, technical and sentiment, so too those pillars can be understood and exploited by breaking down further into FITS.
Fundamental / Technicals
When a market is driven by a clear fundamental trend, it typically gives rise to a clean price trend that can usefully be analysed technically by trending tools such as moving averages, trendlines, wave counts, Fibonacci retracements and so on to pick corrections. When there is fundamental uncertainty such as we have now, the common result is ranging where RSIs, stochastics and other oscillators are more appropriate. However where there is an uncertain trend such as the emerging protectionist USD downtrend (time-adjusted for the slowness) …
The result is often a combination of the two.
Ironically, our projection of protectionist economic deterioration leading to lower yields and a slow dollar turn is also punctuated by a trade war resolution that sees both a yield and USD (wave 2 or B) ramp that is an excellent opportunity to sell Dollars in what will definitely appear wrongly to be a consolidation market before a more aggressive downtrend. Why? If you take away tariffs and lower interest rates away from the Trump arsenal he is more likely to resort to a managed or inspired USD devaluation (wave 3 or C)
Intermarket / Technicals
Currency pairs should theoretically follow their interest rate differentials (see previous intermarket analysis). And where the differential is trending so will currencies, and where they are consolidating so will the currency pair. However, add uncertainty and a market that lacks breadth and isn’t correlating you then they will trend but more slowly until there is less uncertainty (resolution?). Typically the more closely a pair tracks the trending differential such as USDCAD and USDJPY, they are cleaner they are in trend technicals.
However pairs that are more subject to lags and deviations are much slower and messier. Either consolidation tops (ie EURUSD 1.25) and bottoms or first leg of the trend leading diagonals (ie the current EURUSD).
Technically these are very difficult to analyse shorter term and even harder to trade, but do provide excellent option strategies as volatility is low followed by substantial volatility hikes. Of course knowing that they are erratic and subject to deep sentiment driven technical pullbacks is helpful. To be forewarned is to be forearmed.
Technical and Sentiment Technicals
Knowing how your instrument trades technically is useful for trends and corrections and that is often down to typical market sentiment (ie what traders do) in that particular instrument. Knowing the typical scale nature and duration of corrections helps rejoins trends. For example when USDJPY trends it is often restricted to 23.6-38.2% correction as we have seen in the last decline. Whereas GBPUSD prefers much deeper corrections, sometimes almost full retracements as we are seeing now. But knowing how they trades seasonally and cyclically is also useful and that is often down also to sentiment.
In July, Forex is commonly subject to choppy and, perhaps self-fulfilling, thinner lower volume trading.
The result is a more erratic market that seeks weak stops particularly in weak trends. In July you can often use the stops as entry points or take the opposite view and keep much wider stops to avoid the July chop.
The current market is subject to one of the biggest fundamental debates we have seen in a while. It is no wonder that it is so emotional and will remain so arguably until after a resolution to the Trade war. Until then the technicals will remain weak particularly in foreign exchange and particularly in July. Of course, that doesn’t mean there aren’t plenty of excellent trading opportunities. Just the opposite. Knowing the market you are in is helpful, knowing how your instrument trades in such an environment makes trading easier. Knowing how it trades through a notoriously difficult month is the key to avoiding the Chop and losses. July has started well for us. With history on our side we are confident it will continue that way. particularly as later in the third quarter we often see much cleaner easier trends. July should perhaps be seen not a month of chop but a month of opportunity for those later trends. When opportunity knocks. take it!
Here’s to making the very best.
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